23 March 2018
On January 1, 2018, the new revenue recognition rules established by Accounting Standards Codification (ASC) 606 and International Financial Reporting Standard (IFRS) 15 will go into effect for most public companies. Companies may choose to implement the new rules in two ways: under the “full retrospective” method, they must adjust and reissue fiscal 2016 and fiscal 2017 financial statements in connection with their 2018 Forms 10-K, whereas under the “modified retrospective” method, they need only apply the new standard to contracts entered into on or after the effective date (and adjust the opening retained earnings for any contracts with remaining obligations on January 1, 2018). Companies choosing to use the full retrospective method may have their access to capital markets limited until they have adjusted and reissued financial statements for all required prior periods. Companies filing a registration statement including financial statements for a period after the new rules' implementation must reissue financial statements for all periods that must be included or incorporated by reference. This will require companies to adjust and reissue financial statements for multiple previous years in order to properly file a registration statement. Companies also must consider whether the accounting standards change constitutes a fundamental change that would require them to file a Form S-3 to update the registration statement. Companies also must consider whether their auditors are willing to provide comfort letters on financial statements that have not been adjusted and reissued. Emerging growth companies (EGCs) may defer their implementation of the new rules until January 1, 2019, when the rules go into effect for private companies. While EGCs typically account for more than 80% of initial public offerings, EGCs in certain industries may pass on the election to implement the new rules until a later date, due to the significance of these new revenue recognition rules, to appease investors with published results comparable to peers. For more information, see http://www.ifrs.org/issued-standards/list-of-standards/ifrs-15-revenue-from-contracts-with-customers/ and http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176164076069&acceptedDisclaimer=true.